The consolidation of securities laws, existing decriminalisation of offences under the Companies Act and the proposed decriminalisation under the LLP Act marks an important move towards making Indian corporate legal framework, simpler, business friendly and ultimately (hopefully) reducing compliance costs. The securities market code is in line with previous discussions on the NFRA. It marks a step towards streamlining the multiple laws, ordinances, guidelines and regulations. If drafted and executed in a proper manner, it will be helpful to market participants and remove any possible conflicts in the regulatory framework and will provide clarity in policy making to investors and stakeholders.
Since March 2020, the Securities and Exchange Board of India (SEBI) has relaxed various provisions of rules and regulations for listed entities on account of the pandemic. Recent relaxations include:
The Securities and Exchange Board of India (“SEBI”) has, after taking into consideration requests received from listed entities and industry bodies as well as considering the prevailing business and market conditions, decided to grant relaxation from the applicability of the circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115) on the actions to be taken in case of non-compliance of the minimum public shareholding (“MPS”) requirements.
What is minimum public shareholding?
In terms of the Securities Contracts (Regulation) Rules, 1957, as amended (“SCRR”) read with Regulation 28 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“Listing Regulations”), listed companies are required to maintain public shareholding of at least 25%. The obligation to reach and maintain this MPS threshold of 25% is attracted in three separate instances:
(a) Initial listing – In terms of Rule 19(2)(b) of the SCRR, the minimum offer and allotment to public in terms of an offer document by a company seeking listing, has to be within the range of at least 10% to at least 25%, subject to the post-issue market capitalisation of the listed company. If the post-issue market capitalisation of the listed company is more than Rs. 1,600 crores, the listed entity has the option, but not obligation, to offer and allot less than 25% of its capital to the public. The relaxation of issuing less than 25% of its capital to the public is available subject to the listed entity meeting the MPS threshold of 25% within a period of three years from the date of listing of its securities;
(b) Continuous listing – In terms of Rule 19A of the SCRR, every listed company, other than a public sector company, is required to maintain the MPS threshold of at least 25%. In case of a public sector company which has public shareholding below 25% on the commencement of the Securities Contracts (Regulation) (Second Amendment) Rules, 2018, a period of two years has been provided from the date of such commencement to restore the MPS to 25%. For companies covered under (a) above, the obligation to maintain MPS initiates from the date upon which the threshold of 25% MPS is first achieved.
(c) Violation of continuous listing – In the event that a listed entity, other than a public sector company, breaches the MPS threshold of 25%, it is required to bring back MPS threshold to 25% within a period of 12 months from the date of the breach of the threshold. For public sector companies, a two-year window is provided to restore the MPS threshold to 25%. Further, a three-year time period is provided to listed companies for restitution of the MPS threshold for breaches caused by issue of depository receipts or implementation of a resolution plan under Section 31 of the Insolvency and Bankruptcy Code, 2016.
Non-compliance of the MPS requirements
In terms of Regulation 97 of the Listing Regulations, a recognized stock exchange is charged with the duty to monitor compliance with the provisions of the Listing Regulations. Further, Regulation 98 of the Listing Regulations provides for penal actions that may be undertaken by stock exchanges in case of failure to comply with the provisions of the Listing Regulations, including the requirement to maintain MPS threshold. Towards this end, SEBI issued a circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115), directing stock exchanges to review compliance with MPS requirements based on shareholding pattern/ other filings made with them by the listed entities from time to time and within fifteen days from date of observation of non-compliance, to issue notices to such entities intimating all actions taken/ being taken as per this circular and advise the entities to ensure compliance. On observing non-compliance, the recognised stock exchanges may take actions such as (i) levying of a fine against the listed entities for each day of non-compliance; (ii) freezing the entire shareholding of the promoters and promoter group in conjunction with depositories; (iii) freezing of all securities held in the dematerialized beneficial ownership accounts of the promoters and promoter group; and (iv) banning the promoters, promoter group and directors from taking up any new position as director of a listed entity. The recognised stock exchange may also consider compulsory delisting of the non-compliant listed entity.
Manner of achieving MPS
SEBI has by way of a circular dated November 30, 2015 (Circular No. CIR/CFD/CMD/14/2015) provided the mechanisms through which a listed entity may achieve compliance with MPS threshold. The approved mechanisms include (a) issue of fresh shares to public through prospectus (further public offering); (b) offer for sale of shares by promoters to public through prospectus (further public offering); (c) sale of shares by promoters through the stock exchange offer-for-sale mechanism; (d) offer for sale of shares by promoters by way of a qualified institutions placement; (e) rights issues with the promoters and/or members of the promoter group forgoing their entitlement; and (f) bonus issues with the promoters and/or members of the promoter group forgoing their entitlement. Mechanisms not specifically set out in this circular or elsewhere under SEBI regulations, can also be utilised, subject to approval of SEBI.
Relaxation provided by SEBI
Given the current volatility in the markets, SEBI, in its recent circular dated May 14, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/81) (the “Circular”) has provided a temporary relaxation to listed entities for whom the due date for complying with the minimum public shareholding fell within the time period of March 1, 2020 to August 31, 2020. SEBI has also advised recognized stock exchanges not to take any penal action as envisaged in the SEBI circular dated October 10, 2017 (Circular No. CFD/CMD/CIR/P/2017/115) against such entities in case of non-compliance during the said period. Penal actions, if any, initiated by stock exchanges from March 1, 2020 till May 14, 2020 for non-compliance of the MPS requirements by such listed entities may be withdrawn.
The Circular shall come into force immediately.
Please refer to the SEBI circular dated May 14, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/81) for more details.
In view of the COVID 19 pandemic, the Securities and Exchange Board of India (“SEBI”) has provided certain relaxations to listed entities, from compliance with certain provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) vide its circulars, most recent of which is the circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79), which provides for (i) additional relaxations in line with clarifications released by the Ministry of Corporate Affairs (“MCA”) dated April 8, 2020 and April 13, 2020; and (ii) further extension to certain relaxations already provided by SEBI vide its circulars dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38), March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), April 17, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/63) and April 23, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/71.
Set out below are the key relaxations to the SEBI LODR Regulations provided:
1. Extension of timelines for submission of certificates
In terms of the SEBI LODR Regulations, listed entities are required to file certain compliance certificates with the stock exchanges, indicating compliance with regulatory requirements. These include
(a) Certificate on maintenance of share transfer facility as per Regulation 7 (3) which is to be filed within one month of the end of each half of the financial year.
Pursuant to the SEBI circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38), the due date for the submission of the compliance certificate for the half year ended March 31, 2020 has been extended from April 30, 2020 to May 31, 2020.
(b) Secretarial compliance report for listed entities and their material unlisted subsidiaries in terms of Regulation 24A, which is to be annexed to the annual report.
This requirement has been relaxed vide the SEBI circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38) from May 30, 2020 to June 30, 2020 for the financial year ended March 31, 2020.
(c) Certificate from practicing company secretary on share certificates as per Regulation 40(9) to be submitted within one month of the end of each half of the financial year, certifying that all certificates have been issued within thirty days of the date of lodgement for transfer, sub-division, consolidation, renewal, exchange or endorsement of calls/allotment monies and submit the same with the stock exchange.
SEBI vide its circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), has extended the due date for submission of the aforementioned certificate, for the half year ended March 31, 2020, from April 30, 2020 to May 31, 2020.
2. Financial results
As per Regulation 33(3)(c) of the SEBI LODR Regulations, a listed entity is required to submit with the stock exchange, its standalone and consolidated (if applicable) quarterly financial results within 45 days of the end of the particular quarter. This requirement has been relaxed for the quarter ended March 31, 2020 pursuant to SEBI circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38). The due date for submission of the aforementioned financial results is revised from May 15, 2020 to June 30, 2020.
Further, as per Regulation 33(3)(d) of the SEBI LODR Regulations, a listed entity is required to submit with the stock exchange, its standalone and consolidated (if applicable) annual audited financial results within sixty days of the end of the financial year. This requirement has been relaxed for the quarter ended March 31, 2020 pursuant to SEBI circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38). The due date for submission of the aforementioned financial results is revised from May 30, 2020 to June 30, 2020.
In addition to the above, by way of SEBI circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79), SEBI took note of the representation from listed entities that are banks and insurance companies with relation to the difficulties faced by them in the preparation of consolidated financial results under regulation 33(3)(b) in view of different accounting standards being followed by companies belonging to same group and the difficulties in restating those financials as per Indian Accounting Standards (“Ind AS”) due to the prevailing circumstances in view of COVID 19 pandemic. The Reserve Bank of India through its notification dated March 22, 2019, has deferred the implementation of Ind AS until further notice to provide relief to scheduled commercial banks.
In light of the above, SEBI in the circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79) has clarified that listed entities which are banking and / or insurance companies or having subsidiaries which are banking and / or insurance companies may submit consolidated financial results under regulation 33(3)(b) for the quarter ending June 30, 2020 on a voluntary basis. However, they shall continue to submit the standalone financial results as required under regulation 33(3)(a) of the LODR. If such listed entities choose to publish only standalone financial results and not consolidated financial results, they shall give reasons for the same.
3. Provisions relating to frequency of meetings
As the lockdown has imposed restrictions on physical gatherings and companies have been facing difficulties in conducting meetings completely through electronic audio-visual means, SEBI has provided certain relaxations pertaining to the frequency of meetings to be held by listed entities. It may be noted that certain of these provisions will also require a corresponding relaxation from the MCA, which one can hope will be forthcoming shortly.
(a) As per Regulation 17(2), the board of directors of a listed entity is required to meet at least four times a year, with a maximum time gap of one hundred and twenty days between any two meetings and as per the Regulation 18(2)(a), the audit committee of a listed entity is also required to meet at least four times a year, with a maximum time gap of one hundred and twenty days between any two meetings. SEBI vide its circular dated March 19, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/38) has exempted listed entities from observing the maximum gap between the meetings held or proposed to be held between December 1, 2019 and June 30, 2020. However, it has been clarified that there is no relaxation provided to the board of directors / audit committee from ensuring that they meet four times in a year.
(b) SEBI has vide its circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), extended the time limit provided to listed entities to have one meeting of the nomination and remuneration committee, stakeholders relationship committee and risk management committee as required under Regulation 19(3A), Regulation 20(3A) and Regulation 21(3A), respectively, of the SEBI LODR Regulations. A listed entity is now required to comply with this requirement by June 30, 2020 instead of March 31, 2020.
(c) As per Regulation 44(5) of the SEBI LODR Regulations, the top 100 listed entities by market capitalization, determined as on March 31st of every financial year, shall hold their annual general meetings within a period of five months from the date of closing of the financial year. SEBI vide its circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), has extended the time limit for conducting the annual general meeting from August 31, 2020 to September 30, 2020. Further, SEBI has in its circular dated April 23, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/71 clarified that the extended time limit of up to September 30, 2020 shall also be applicable to the top 100 listed entities by market capitalization, whose financial year ended on December 31, 2020.
4. Provisions relating to publication and dispatch of forms and advertisements
In view of the impact of the current lockdown on postal services and physical newspapers, SEBI has also dispensed with or relaxed requirements relating to postal dispatch of forms or publication in physical newspapers, including:
(a) SEBI vide its circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79), has temporarily dispended the requirement of sending proxy forms for general meeting to holders of securities as per Regulation 44(4), in case such meetings are held through electric mode. This relaxation is available for listed entities who conduct their AGMs through electronic mode during the calendar year 2020 (i.e. till December 31, 2020).
(b) Regulation 36 (1)(b) and (c) of SEBI LODR Regulation prescribes that a listed entity shall send a hard copy of the statement containing salient features of all the documents, as prescribed in Section 136 of the Companies Act, 2013 to the shareholders who have not registered their email addresses and hard copies of full annual reports to those shareholders, who request for the same, respectively. Regulation 58 (1)(b) &(c) of the SEBI LODR Regulations extend similar requirements to entities which have listed their NCDs and NCRPS. SEBI vide its circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79), has dispensed the aforementioned requirements for listed entities who conduct their annual general meetings during the calendar year 2020 (i.e. till December 31, 2020).
(c) SEBI vide its circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48) read with its circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79) has exempted publication of advertisements in newspapers, as required under Regulation 47 of SEBI LODR Regulations, for all events scheduled till June 30, 2020, since some newspapers had stopped their print versions due to the COVID 19 pandemic.
5. Timelines for provision of intimation to stock exchanges
In view of the difficulties caused by the pandemic to normal operations of companies, SEBI has provided temporary relaxations regarding certain intimations to be provided to stock exchanges:
(a) As per Regulation 29 (2) of the SEBI LODR Regulations, stock exchanges need to be provided prior intimation about meetings of the board (excluding the date of the intimation and date of the meeting) as follows: (i) at least five days before the meeting if financial results are to be considered; and (ii) two working days in other cases.
SEBI vide its circular dated April 17, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/63) has decided that the above requirement under Regulation 29 (2) of SEBI LODR Regulations of prior intimation of five days / two working days shall be reduced to two days, for board meetings held till July 31, 2020.
(b) As per Regulation 39 (3) of the SEBI LODR Regulation, requires listed entities to submit information regarding loss of share certificates and issue of the duplicate certificates, to the stock exchange within two days of the listed entity receiving information.
SEBI vide its circular dated April 17, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/63) has decided that any delay beyond the stipulated time will not attract penal provisions laid down vide SEBI circular no. SEBI/HO/CFD/CMD/CIR/P/2018/77 dated May 3, 2018. This relaxation is for intimations to be made between March 1, 2020 to May 31, 2020.
6. Use of digital signature and electronic payment methods
(a) SEBI vide its circular dated April 17, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/63) has clarified that authentication / certification of any filing / submission made to stock exchanges under the SEBI LODR Regulations may be done using digital signature certifications until June 30, 2020.
(b) As per Regulation 12 of the SEBI LODR Regulations, issuance of ‘payable at par’ warrants or cheques in case it is not possible to use electronic modes of payment. Further, in case the amount payable as dividend exceeds Rs.1500, the ‘payable-at-par’ warrants or cheques shall be sent by speed post.
SEBI by way of the circular dated May 12, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/79) has clarified that the requirements of this regulation will apply upon normalization of postal services and in cases where email addresses of shareholders are available, listed entities shall endeavor to obtain their bank account details and use the electronic modes of payment specified in Schedule I of the SEBI LODR Regulation.
7. Deferral of effective date of operation of the SEBI circular on standard operating procedure
SEBI vide circular no. SEBI/HO/CFD/CMD/CIR/P/2020/12 dated January 22, 2020 issued the Standard Operating Procedure (“SoP”) on imposition of fines and other enforcement actions for non-compliances with provisions of the SEBI LODR Regulations, the effective date of operation of which is for compliance periods ending on or after March 31, 2020. Pursuant to the SEBI circular dated March 26, 2020 (Circular No. SEBI/HO/CFD/CMD1/CIR/P/2020/48), the said circular dated January 22, 2020 shall now come into force with effect from compliance periods ending on or after June 30, 2020. It may be noted that the SoP circular dated May 3, 2018 would be applicable till such date.
In view of the COVID-19 pandemic, the Government of India, Department of Revenue had vide Gazette Notification No. G.S.R. 261(E) dated April 22, 2020 (“Notification”) permitted, interalia eight reporting entities to carry out electronic know-your-customer (“e-KYC”) Aadhar authentication by exercising its powers under the proviso to Section 11A of the Prevention of Money-Laundering Act, 2002 (“PMLA”).
Section 11A of PMLA lays down the documents using which a reporting entity must verify the identity of its clients and the beneficial owner. E-KYC using Aadhar authentication is only permitted to banking companies. However, if the Central Government is satisfied that a reporting entity other than a banking company, complies with the standards of privacy and security under the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016 then it may, post consultation with Unique Identification Authority of India (“UIDAI”) and the appropriate regulator, permit such entity to perform e-KYC using Aadhar authentication.
Accordingly, in furtherance of the Notification, the Securities and Exchange Board of India (“SEBI”), vide its circular dated May 12, 2020 (circular no. SEBI/HO/MIRSD/DOP/CIR/P/20 has allowed the following eight entities to undertake e-KYC Aadhar authentication of their clients:
- BSE Limited
- National Securities Depository Limited
- Central Depository Services (India) Limited
- CDSL Ventures Limited
- NSDL Database Management Limited
- NSE Data and Analytics Limited
- CAMS Investor Services Private Limited
- Computer Age Management Services Private Limited
The Central Government had also notified Link Intime India Private Limited for carrying out the authentication of the Aadhaar number of clients using e-KYC authentication facility. However, SEBI is yet to recommend them.
The eight notified entities have to register themselves with UIDAI as KYC user agency post which they shall allow SEBI registered intermediaries / mutual fund distributors to undertake Aadhaar authentication in respect of their clients for the purpose of the KYC. The SEBI registered intermediaries / mutual fund distributors who want to avail the facility of Aadhar authentication will have to enter into an agreement with a KYC user agency as well as get themselves registered with UIDAI as sub KYC user agency. The intermediaries registered as KYC user agencies or as sub KYC user agencies are required to follow the processes set out in the SEBI circular dated November 5, 2019, including obtaining permission from UIDAI for sharing e-KYC data, maintenance of auditable logs of transactions were e-KYC data is shared and mechanisms for monitoring irregular transactions. The process and use of technology for online KYC verification has also been clarified by SEBI by way of circular dated April 24, 2020.
This is a welcome move by SEBI given the lockdown prevailing in the country, as this will allow investors to comply with the applicable KYC requirements using Aadhar authentication and they will not have to physically visit the intermediaries. Moreover, it will lead to ease of investing, customer convenience, increased efficiency and reduced timelines for onboarding of clients. Using the e-KYC Aadhar authentication, one can now complete the KYC requirement of their demat account, brokerage account, trading account, make investments in mutual funds and other securities including applying to new systematic investment plan, systematic transfer plan and, dividend transfer plan, subscribe to overseas direct investments. Resident Indian foreign portfolio investors may also utilise the e-KYC Aadhaar authentication to comply with their KYC requirements. Further, one may now undertake e-KYC using Aadhar authentication with their SEBI registered portfolio managers, asset managers and wealth managers and other SEBI registered intermediaries and mutual fund distributors.
It is to be noted that e-KYC using Aadhar authentication is only optional and investors may continue to use the other officially valid documents as notified by the Central Government to be KYC compliant. Additionally, none of the reporting entities can store a client’s core biometric information or the Aadhar number.
Please refer to the SEBI circular dated May 12, 2020 (circular no. SEBI/HO/MIRSD/DOP/CIR/P/20) for more details.
In light of the recent developments relating to the COVID-19 pandemic (and its ongoing consequent impact on the Indian and global economy), the Securities and Exchange Board of India (“SEBI”), had recently, vide its two circulars, each dated April 21, 2020 (“April Circulars”), granted (a) temporary relaxations from compliance with certain provisions of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended (“SEBI ICDR Regulations”), and (b) one-time relaxation with respect to validity of SEBI observations, in respect of rights issues, with an intent to improve fund raising access to listed corporate entities as well as revive investor confidence in the securities market. With the aforesaid intention in mind, SEBI has issued another circular dated May 6, 2020 (Circular No. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) (“Circular”), for granting relaxation relation to (a) certain procedural matters in relation to rights issues, and (b) authentication of offer documents and inspection of documents electronically for all capital markets issues.
The Circular shall be applicable for all rights issues (including fast track rights issues) opening before July 31, 2020, and for all offer documents filed until July 31, 2020.
Key aspects of the Circular
A. Relaxation in respect of rights issues
i. Availability of letter of offer and other issue materials
Regulation 77(2) of the SEBI ICDR Regulations prescribes that the abridged letter of offer (along with application form), can be despatched either through registered post, speed post, courier service or by electronic transmission to all existing shareholders of the issuer company, prior to the opening of the issue.
However, keeping in mind the various practical challenges that may arise in the COVID-19 era, particularly in relation to engaging courier or postal services, SEBI has now specifically clarified that failure to dispatch the aforesaid offering material through registered post or speed post or courier services, due to prevailing COVID-19 related conditions, will not be treated as non-compliance, for rights issues opening up to July 31, 2020. To supplement the aforesaid relaxation, the following additional steps are required to be undertaken:
- issuers are required to publish the letter of offer, abridged letter of offer and application forms on its website as well as on the websites of the lead manager(s) to the issue, registrar to the issue and stock exchanges; and
- issuers as well as the lead manager(s) to the issue are required to undertake adequate steps to reach out to the shareholders through other means, including through SMS, ordinary post, audio-visual advertisements on television, as well as digital advertisements.
These measures help issuers negate the difficulties they may face in respect of physical distribution of offering material. The availability of offering material on the internet would ensure that potential investors get access to the same through virtual means. Having said that, digital modes of communication may not be preferred by a select set of investors, who are either not accustomed to such platforms, or may face challenges in receiving uninterrupted internet network connectivity.
Thus, the aforesaid clarification showcases SEBI’s positive intent towards making the Indian capital markets regime a technologically driven and an environment friendly one, and we may hope for increased usage of electronic transmission systems for dispatch of the aforesaid offering materials, not only during the next couple of months, but also in the coming years in the post COVID-19 era.
Further, in light of the Circular and other representations received re provision of clarification on mode of issue of notice (referred to in Sections 62(1)(a)(i) of the Companies Act, 2013 (“Companies Act”) for rights issues by listed companies, in view of difficulties faced by such companies in sending notices through postal/courier services on account of the threat posed by the COVID-19 situation, the Ministry of Corporate Affairs, Government of India, issued a clarificatory circular dated May 11, 2020 (General Circular No. 21/2020) (the “MCA Circular”). The MCA Circular clarified that the inability to dispatch the notice (referred to hereinabove) by listed companies (which comply with the Circular) to their shareholders through registered post, speed post or courier would not be viewed as a violation of Section 62(2) of the Companies Act. The MCA Circular shall be applicable in case of rights issues opening up to July 31, 2020.
ii. Issue-related advertisements
Prior to the opening of the rights issue, the issuer is required to publish advertisement(s) in certain specific newspapers (“Statutory Newspapers”), containing the disclosures mandated under Regulation 84(1) of the SEBI ICDR Regulations (“Statutory Advertisement(s)”). However, given the difficulties in publishing physical advertisements (i.e. in newspapers, hoardings, banners, etc.) and the potential inefficacies with respect to their outreach in the COVID-19 era, SEBI has provided a few additional mechanisms for publication of Statutory Advertisements and other issue-related advertisements:
(a) issuers have the flexibility to publish the Statutory Advertisement confirming dispatch of abridged letter of offer and application form in newspapers other than the Statutory Newspapers;
(b) all such advertisements must also be made available on the websites of the issuer, lead manager(s) to the issue, registrar to the issue, and the stock exchanges; and
(c) issuers are also required to make use of advertisements through other electronic media such as television channels, radio and the internet for disseminating information relating to the application process. Further, for the first time, SEBI has permitted such advertisements to be made in the form of crawlers or tickers as well.
The Circular also requires issuers to disclose additional details in Statutory Advertisement(s), specifically in relation to the application process for shareholders who have not been served notice via electronic modes.
iii. Application by physical shareholders
In 2008, SEBI, while acknowledging the market practice of trading of rights entitlements in physical form, envisaged the establishment of a uniform and exchange driven mode of trading of rights entitlements, and released a paper for receiving public comments on the proposed electronic rights issue process and e-trading of rights entitlements. While the proposal for establishing an e-trading platform for rights entitlements did not see the light of the day, SEBI had issued a circular for streamlining certain aspects of the rights issue process on January 22, 2020 (“January Circular”), with the intention of, among other things, reducing issue timelines and permitting trading of rights entitlements in dematerialized form. Pursuant to the January Circular, rights entitlements would have to be mandatorily credited to the demat account of eligible shareholders in dematerialized form, and physical shareholders were required to provide their demat account details to issuer or the registrar to the issue for credit of rights entitlements (within a period of two working days prior to the issue closing date). However, given certain impossibilities during the COVID-19 era, investors (especially those holding securities in physical form) may face several hurdles while undertaking the process of opening a demat account or communicating their demat account details to the issuer or registrar, prior to the issue closing date. While the January Circular was introduced with an intention of establishing an efficient process of credit of rights entitlements to respective demat accounts (which in turn would facilitate the existence of a robust rights entitlements trading platform), the onset of the COVID-19 pandemic has forced SEBI to offer certain relaxations to shareholders.
Keeping in mind the aforesaid challenges, SEBI has, vide the Circular, allowed physical shareholders to submit their applications re the rights issue, irrespective of whether they are able to open demat accounts or communicate details of the demat accounts in accordance with the requirements prescribed in the January Circular. However, the submission of applications by such physical shareholders would be allowed, subject to (a) the institution of a mechanism by the issuer, lead manager(s) to the issue and other intermediaries for allowing such shareholders to apply in the rights issue, and (b) adequate steps being taken by the issuer and lead manager(s) to the issue for communicating the mechanism described in (a) hereinabove to the aforesaid shareholders prior to opening of the issue. Further, such physical shareholders availing of the aforesaid relaxation shall not be eligible to renounce their rights entitlements, and shall receive shares in dematerialized form only.
In light of the aforesaid, we believe that issuers and intermediaries may need to consider utilizing the issuer’s suspense accounts (including the one opened in accordance with Regulation 39 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended (“SEBI Listing Regulations”)) where such rights entitlements and shares (to be credited to the physical shareholders who have applied for allotment of equity shares), will be kept in abeyance in electronic mode by issuers, until the aforesaid shareholders provide details of their demat account particulars to the issuer or registrar, in accordance with the procedure as prescribed under Regulation 39 of the SEBI Listing Regulations.
iv. Non-cash based application process
Pursuant to the January Circular, all eligible shareholders are mandatorily required to use the application supported by blocked amount (“ASBA”) mechanism while applying for shares in a rights issue. However, the onset of the COVID-19 pandemic may have created certain practical roadblocks with respect to the transition to an ASBA only mechanism.
Shareholders who have not transitioned to using an ASBA account may face hurdles while trying to do so in the COVID-19 era, especially in light of the existence of a nation-wide lockdown. Further, an SCSB, a critical intermediary at the forefront of the ASBA process, may find it difficult to function optimally with reduced staff strength, given the remote working landscape that is now prevalent across industries.
In light of the practical difficulties and systemic challenges faced by both investors as well as intermediaries, SEBI has permitted issuers (along with the lead manager(s), the registrar, and other intermediaries) to institute optional mechanisms (non-cash mode only) to accept the application money from the shareholders. In view of the aforesaid, issuers and other intermediaries may look to establish mechanisms whereby application monies can be paid by way of online transfers into designated accounts. However, the Circular clarifies that no third party payments shall be allowed in respect of any application.
In order to ensure that relaxations provided hereinabove are utilised by the issuer and intermediaries towards achieving investor protection, SEBI has, vide the Circular, imposed a duty on the issuer and the lead manager(s) to the issue to ensure, in respect of the mechanisms referred in points (iii) and (iv) above, that:
(a) the mechanisms shall serve as an additional option, and would not be a replacement of the existing process, and efforts are made to adhere to the existing prescribed framework;
(b) the mechanisms function in a transparent and robust manner (with adequate checks and balances), and the transparency, fairness and integrity of such mechanisms are to the satisfaction of the lead managers and registrar to the issue, without imposing additional costs on investors;
(c) FAQs, a dedicated online investor helpdesk and helpline are created to guide investors through the application process, and to resolve difficulties faced on a priority basis; and
(d) the issuer, lead manager(s), registrar and other intermediaries are responsible for all investor complaints.
B. Relaxations in respect of all offer documents
i. Relaxations in relation to digital signatures and electronic inspection of material documents
In respect of all offer documents filed until July 31, 2020, SEBI has now permitted:
(a) usage of digital signature certifications for authenticating and certifying offer documents; and
(b) the issuer and lead manager(s) to establish a procedure for electronic inspection of material documents.
While the former is an option that may be used by the issuer, the latter appears to be a mandatory requirement. In light of the aforesaid, issuers may now be required to look for cost-effective ways of providing access to these documents, which may be through secured mechanisms, such as password-protected dedicated portal on the issuer’s website (wherein entry may be permitted via communications sent by way of SMS, emails, etc.).
Moreover, on a plain reading of the Circular, it appears that this part of the Circular shall be applicable for ‘all offer documents filed until July 31, 2020’ (and not just limited to rights issues alone), which may mean that inspection of material documents shall only be done electronically in case of all issues wherein the respective offer document (i.e. red herring prospectus, prospectus, shelf prospectus and letter of offer, as the case may be) is filed until July 31, 2020.
In these turbulent times of the COVID-19 pandemic, SEBI is trying to leave no stone unturned to revive Indian capital markets. With the issuance of the April Circulars and the Circular, it is quite evident that SEBI is looking to improve access to real-time fund raising options, with a specific focus on making the rights issue process technology friendly. While SEBI has tried to restore issuers’ and investors’ confidence in Indian capital markets with a slew of relaxations, it has kept in mind investor protection ideals and traditions while offering the same.
However, it must be borne in mind that issuers, lead manager(s), registrars and other market intermediaries may face increased costs in the process of setting up the mechanisms discussed hereinabove. Moreover, it must not be forgotten that advertisements and other publicity materials issued pursuant to these relaxations would still have to pass the rigours of publicity restrictions prescribed under the SEBI ICDR Regulations. Regardless of the aforesaid, the efficacy of these relaxations can be completely examined only after the completion of few rights issues and interaction with market intermediaries.
Please refer to the SEBI circular dated May 6, 2020 (circular no. SEBI/HO/CFD/DIL2/CIR/P/2020/78) for more details.
The State Government of Tamil Nadu has vide notification no. G.O.(Ms)No.217 dated 03 May 2020, issued the following orders for the effective containment of COVID-19:
- The lockdown period has been extended from 00.00hrs of 04.05.2020 to 24:00hrs of 17.05.2020.
- Agricultural and other activities already permitted, would continue to be permitted during the lock-down period.
- Existing restrictions for the below mentioned operations shall stand unaltered until further notification:
a. Schools, colleges, training centers, research institutions and all other educational institutions;
b. Public gatherings at place of worship and religious centers;
c. Theaters, shopping malls, gymnasiums, swimming pools, sports complexes, assembly halls and similar places;
d. Gatherings and processions of all nature including religious functions, social, political, sports, entertainment, academic and cultural and other gatherings;
e. Air, rail and public bus transport for passenger movement (except dedicated staff buss/Vans used by industries and establishments);
f. Taxi, auto, cycle rickshaw;
g. Metro rail services;
h. Inter-state public movement;
i. Hotels (excluding the employees’ accommodation), lodges and resorts;
j. Mall, barber shop, salon, spa, & beauty parlor;
k. Air-conditioned showrooms selling jewels, clothes and departmental stores will not be permitted;
l. Funeral procession with not more than 20 persons; and
m. Marriages upon adherence to existing restrictions.
- No activity shall be permitted in the containment zones.
- Strict surveillance will be done on gathering of more than 5 people.
- The following activities are allowed in all areas falling under the jurisdiction of Greater Chennai Police (excluding containment zones):
a. Construction works, provided the workers reside in the place where the construction work is carried on. Workers from outside should be brought on a one time basis.
b. Construction works (including laying of roads) undertaken by Government and Public Sector Undertakings.
c. Undertakings functioning in SEZ, EOU and Export Units: provided that 25% workers alone (minimum 20 workers) shall be permitted upon such undertakings allowed after due inspection and assessment by Commissioner, GCC / District Collector. Strict access control must be ensured. Employees shall travel only in vehicles operated by the respective Organisation.
d. IT and ITes services, provided that 10% workers alone (minimum 20 workers) shall be permitted. Employees shall travel only in vehicles operated by the respective Organisation.
e. Shops selling essential commodities from 6.00 A.M till 5.00 P.M. shall be permitted.
f. E- Commerce services providers, handling food and essential commodities; shall be permitted based on the already permitted timings.
g. Restaurants shall be permitted from 6.00 A.M till 9.00 P.M. Parcels alone shall be permitted.
h. All Standalone and neighborhood shops (except saloons, spa and beauty parlours); construction hardware, cement, construction materials, sanitaryware, electrical items, mobile phone, computers, household appliances, electric motor and spectacles stores sold by standalone shops shall be permitted from 11.00 A.M till 5.00 P.M.
i. Self-employed workers such as plumber, electrician, air conditioner mechanics, carpenter, home care providers for persons with special needs and household workers shall be permitted after obtaining necessary permission received from Chennai Corporation Commissioner/ District Collector.
- The following activities are allowed in all areas across the states (except for areas under the jurisdiction of Greater Chennai Police and containment zones)
a. All industries, including the textile industries, located outside the Corporation/Municipal limits of the state (except in containment zones) shall be allowed to function with 50% workers (minimum 20 persons). All industrial activities across the village and town panchayat areas shall be allowed.
b. However, in town panchayat having a population of more than 15,000, the District Collector should permit the operations of textile industries with 50% workers based on the local conditions.
c. Functioning of SEZ, EOU, industrial estates, industrial townships in rural and urban areas shall be allowed with 50 % workers.
d. Spinning Mills located in village and town panchayat area shall be permitted to operate with 50% workers on a shift basis by adhering to physical distancing norms.
e. The operations of leather and textile industries dealing with designing and sampling for export purposes shall be allowed in the Municipalities and Corporations with the District Collectors’ permission and with 30% workers after accessing the local situation.
f. Further, the District Collector may permit all export units in urban areas to operate with 50% workers, based on accessing the local condition.
g. IT hardware manufacturing unit are permitted to operate with 50% workers.
h. IT and ITeS services are permitted to operate with 50% employees (minimum 20 persons).
i. Construction works carried in urban areas; provided the workers reside in the place where the construction work is carried on.
j. Construction works (including laying of roads) undertaken by Government and Public Sector Undertakings;
k. Self-employed workers such as plumber, electrician, air conditioner mechanics, carpenter, shall be permitted to work upon permission received from District Collector.
l. Care givers for persons with special needs, physically challenged, elderly and sick patients, domestic helpers shall be permitted upon obtaining permission from the District Collector.
m. Printing press operations shall be permitted.
n. Shops selling construction hardware, cement, construction materials, sanitaryware, electrical equipment for enabling construction work shall be permitted to operate between 9.00 A.M. to 5.00 P.M. both in urban and rural area. There shall be no restriction on transportation of construction materials.
o. Standalone establishments including those for mobile phones, computers, home appliances, electric motor repair, spectacles sale and repair shall be permitted to operate between 10.00 A.M. to 5.00 P.M.
p. All the standalone establishments situated in rural areas shall be permitted to operate from 9.00 A.M. to 5.00 P.M.
q. Restaurants shall operate between 6 A.M. to 9.00 P.M. for takeaway only.
r. E-Commerce establishments shall operate as permitted earlier.
s. District Collectors may upon circumstances permit the operation of all the standalone shops shall operate between 10 A.M. to 5 P.M. except malls and market complexes located in municipalities and corporations (Salon, spa and beauty parlour are not permitted).
- All industrial establishments shall strictly adhere to the SOPs listed out in Para VIII (Strict adherence to SOPs), Annexure I (SOP to be adhered with while restarting industries), Annexure II (SOP for construction industry) and Annexure III (SOP and measures to be taken if a COVID-19 positive is identified in a facility) of the notification.
- All activities mentioned below shall be permitted to function along with those activities that were already permitted:
a. Agricultural and allied activities, plantation (including agro processing);
b. Marine and inland fishing subject to the instructions issued by the fisheries department;
c. Animal husbandry, milk, milk processing and poultry;
d. Healthcare institution including AYUSH centers, pharmacies, laboratories and diagnostics;
e. All manufacturing of essentials;
f. All continuous process industries;
g. In case of industries that are not permitted to operate – essential maintenance activities shall be carried on for safety purposes with minimal skeletal staff;
h. Manufacture and sale of agricultural implements, fertilizers, insecticides, pesticides, etc.;
i. Financial institutions like RBI, SEBI, Banks, NBFCs, ATMs and related services;
j. All media, postal services, telecom services;
k. Public utility services;
l. Social sector activities like home for senior citizens, etc.;
m. All goods carriers;
n. Logistics, warehousing and cold chain;
o. All seaports, airports and railways stations for cargo/goods movement, etc.;
p. Construction activities;
q. Mining activities and mineral production;
r. Amma canteens;
s. Hotels, e-commerce and shops selling food, grocery, and essential commodities;
t. MGNREGS activities
- If it becomes difficult to ensure safety, shops/markets selling meat, fish, vegetables, etc. can be shifted to larger spaces;
- Major industries, IT and ITes establishments, and construction activities shall be permitted after obtaining passes for the vehicles used for transportation of vehicles; Only 50% of the seating capacity shall be occupied;
- No separate passes shall be required for MSME located in the specified areas. However, MSME employees should carry the ID card issued by the company.
- All state government and central government offices shall function with 33% staff strength. However, all essential government services (including registration department) shall function with full strength; No separate pass shall be required while moving on duty.
The Tamil Nadu State Government has ordered the Greater Chennai Corporation and District Collectors to follow the above guidelines and accord necessary permissions to all permitted industries, enabling then to start their operations from 06 May 2020 onwards.
Violation of these measures shall be liable to be proceeded under Section 51 to 60 of the Disaster Management Act, 2005 besides legal action under Section 188 of Indian Penal Code and other relevant provisions
This notification is accessible at: https://cms.tn.gov.in/sites/default/files/go/revenue_e_217_2020_0.pdf
In view of the COVID-19 pandemic, the Securities and Exchange Board of India (SEBI), vide its press release no. 24/2020 dated April 27, 2020, (Press Release), has decided to reduce broker turnover fees and filing fees on offer documents for Public issue, Rights issue and Buyback of shares.
By way of this Press Release, SEBI has decided that the broker turnover fee will be reduced to 50% of the existing fee structure for the period June 2020 to March 2021. The benefit of this reduction in fees will automatically be passed on to the investors as well. Further, filing fees on offer documents for Public issue, Rights issue and Buyback of shares will be reduced to 50% of the existing fee structure. This will be effective for documents filed from June 1, 2020 to December 31, 2020.
While the above development is based on a press release issued by SEBI, we anticipate that in due course of time, a detailed circular may be issued by SEBI for amending the relevant provisions of the applicable regulations including but not limited to the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended, the Securities and Exchange Board of India (Buy Back of Securities) Regulations, 2018, and the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992.
Please refer to the Press Release dated April 27, 2020 (no.: 24/2020) for more details.
In view of the COVID-19 pandemic and nation-wide lockdown and with a view to improving access to funding to corporates through capital markets, the Securities and Exchange Board of India (SEBI), by way of press release dated April 21, 2020, bearing no. PR No.23/2020, has granted certain temporary relaxations from compliance with certain provisions of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended, (SEBI ICDR Regulations) related to rights / public issuances by listed entities.
Pursuant to the press release, SEBI has notified two circulars dated April 21, 2020, each for (i) relaxations to issuers from certain provisions of the SEBI ICDR Regulations in respect of rights issue; and (ii) one-time relaxation to issuers with respect to validity of SEBI observations. The contents of the circulars are as follows:
(i) Relaxations to issuers from certain provisions of the SEBI ICDR Regulations in respect of rights issue
SEBI, vide its circular dated April 21, 2020, (circular no. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) has granted temporary relaxation to the (a) minimum subscription requirements for rights issues; (b) threshold for not filing the draft letter of offer; and (c) eligibility conditions related to fast track rights issues. These relaxations are applicable to right issues that open on or before March 31, 2021 and are not applicable for issuance of warrants.
(a) Eligibility conditions related to fast track rights issues
SEBI has granted the following temporary compliance relaxations with respect to the eligibility conditions related to fast track rights issues:
- The eligibility requirement related to period of listing of equity shares of the issuer on any stock exchange and compliance with the equity listing agreement or the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, as applicable, has been reduced from 3 years to 18 months;
- The requirement of average market capitalisation of public shareholding of INR 250 crores has been reduced to INR 100 crores; The condition related to no audit qualifications on issuer’s audited accounts has been replaced with the requirement to disclose the impact of audit qualifications on issuer’s financials; The condition related to suspension from trading of equity shares of issuer as a disciplinary measure has been reduced from 3 years to 18 months; and Certain other eligibility conditions with respect to period of compliance with the provisions of the listing regulations, ongoing action initiated by SEBI against the issuer / promoters / directors and settlement of violation of securities laws have also been relaxed.
(b) Minimum subscription requirements for rights issues
The existing minimum subscription to be received in a rights issue shall be at least 90% of the offer through the letter of offer. However, in order to provide greater flexibility in fund raising, this threshold for minimum subscription requirements for a rights issue has been reduced from existing 90% to 75% of the offer size, subject to the condition that if the rights issue is subscribed between 75% to 90%, issue will be considered successful subject to the condition that out of the funds raised, at least 75% of the rights issue size shall be utilized for the objects of the issue other than general corporate purpose.
(c) Threshold for not filing the draft letter of offer with SEBI
An issuer in case of rights issue of size less than INR 10 crores shall prepare the letter of offer in accordance with SEBI ICDR Regulations. However, in order to reduce the time involved in fund raising and for easing the compliance requirements due to the COVID-19 pandemic, the threshold for not filing the draft letter of offer has been increased from INR 10 crores to INR 25 crores in a rights issue.
Please refer to the SEBI circular dated April 21, 2020, (circular no. SEBI/HO/CFD/CIR/CFD/DIL/67/2020) for more details.
(ii) One-time relaxation to issuers with respect to validity of SEBI observations
In view of representations from various industry bodies, SEBI, vide its circular dated April 21, 2020, (circular no. SEBI/HO/CFD/DIL1/CIR/P/2020/66) has provided one-time relaxation with respect to validity of SEBI observations.
As per SEBI ICDR Regulations, any public issue/rights issue may be opened within 12 months from the date of issuance of the observations by SEBI. However, due to the prevailing COVID-19 pandemic, for all public/rights issuers whose SEBI observations have expired or shall expire between March 1, 2020, and September 30, 2020, SEBI has extended the validity of those observations by 6 months from the date of its expiry, subject to an undertaking from the lead manager of the issue confirming compliance with the SEBI ICDR Regulations.
Further, an issuer, whose offer document is pending receipt of SEBI observations and whose estimated issue size is increasing or decreasing by more than 20% shall be required to file a fresh offer document. However, SEBI has relaxed this requirement and permitted to increase or decrease the fresh issue size by up to 50% of the estimated issue size (instead of the present limit of 20%) without requiring to file fresh draft offer document with SEBI. This relaxation shall be applicable for all issues (i.e. IPOs, rights issues and FPOs) opening before December 31, 2020, subject to the following conditions:
- there has been no change in the objects of the issue;
- the lead manager undertakes that the draft offer document is in compliance with provisions of the SEBI ICDR Regulations;
- and the lead manager shall ensure that all appropriate changes are made to the relevant section of draft offer document and an addendum, in this regard, shall be made public.
Please refer to the dated April 21, 2020, SEBI circular (circular no. SEBI/HO/CFD/DIL1/CIR/P/2020/66) for more details.
In wake of the current nationwide lockdown of 21 days as directed by Government of India SEBI has considered the requirement to extend the timelines for processing of various investor requests pertaining to physical securities and compliance and disclosures to be made under SEBI Regulations and various SEBI circulars. In the event of further extension in the lockdown period as directed by Government of India / State Governments, additional relaxation in prescribed timelines for equal number of extended days in lock down is also being given to intermediaries / market participants for the following matters:
- Processing of Remat Requests;
- Processing of Transmission Requests;
- Processing of request for Issue of Duplicate Share Certificates;
- Processing of Requests for Name Deletion/ Name Change/Transposition/ Pending Share Transfers (Re-lodgement cases in the case of share transfers);
- Processing of Requests for Consolidation / Split / Replacement of Share Certificates / Amalgamation of Folios;
- Handling Investor Correspondence / Grievances / SCORES complaint;
- Submission of Half Yearly Report to SEBI pursuant to Circular No. CIR/MIRSD/7/2012 dated July 05, 2012;
- Compulsory Internal Audit of RTAs by CA / CS / CMA holding Certificate of Practice and Certified Information Systems Auditor (CISA)/ Diploma Information Systems Auditor (DISA) pursuant to Circular dated April 20, 2018, issued by SEBI;
- Submission of Audit Report by CISA/CISM qualified or equivalent auditor by QRTAs to SEBI along with comments of the Board; pursuant to Circular dated September 08, 2017 issued by SEBI on Cyber Security and Cyber Security Resilience framework for QRTAs
- Submission of Compliance Report by QRTAs duly reviewed by the Board of Directors of the QRTA to SEBI on Enhanced monitoring ofQRTAs pursuant to Circular dated August 10, 2018 issued by SEBI;
- Regulation 74(5) of the SEBI (Depositories and Participants) Regulations, 2018 on Manner of surrender of certificate of security; and
- Regulation 76 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 on audits.
Please refer to the SEBI circular no. SEBI/HO/MIRSD/RTAMB/CIR/P/2020/59 dated April 13, 2020 for more details.